Headlights on the rupee.

"The covid shock revealed the anachronism of stiff fiscal compression targets set by India's Fiscal Responsibility and Budget Management Act of 2003," wrote the Mint. The government intends to borrow Rs 12 trillion this year instead of Rs 7.8 trillion predicted in the Budget. "Remember, India is endowed with neither the privilege of cheap loans for the asking, nor sufficient slack in productive capacity to keep prices stable." "It is true that economic contraction, as seen in early estimates for the first half of 2020-21, necessitated cheap credit as RBI's top priority in its laudable effort to keep commerce going and contain the pain," wrote the Mint. "It is also true that any over-indebted government could by tempted to inflate some of its debt away by letting prices rise. This should be resisted." After months at over 7%, retail inflation dropped to 6.93% in November due to a fall in vegetable prices. India's consumer basket is heavily weighted in favor of food and beverages, because higher food prices affect the poor disproportionately, with transport, healthcare and education having much lower weights. "Between March and December, Brent crude prices have fallen more than 3%, but petrol and diesel prices have climbed 17% and 15% respectively," wrote the Economic Times. Transport may not contribute much to CPI level directly but "since fuels are not under GST, tax increases cascade into higher prices of everything". Health insurance companies have raised their premiums by up to 200%, especially for senior citizens, forcing some to let their policies lapse, wrote Deepti Bhaskaran. Hundreds of private schools may shut down because the government is not allowing them to charge full fees for the year as teaching switched to online because of the coronavirus. In 2016, the government set a retail inflation target of 4% (+/- 2%) for the Monetary Policy Committee (MPC) at the Reserve Bank (RBI). Some economists argue that "by focusing narrowly on curbing inflation, the MPC lost sight of growth, contributing to India's economic slowdown", wrote Bhattacharya, Kwatra and Devulapalli. However, except in 2017 when the economy was trying to recover from the sudden hit of demonetization, the MPC has always managed to keep average inflation rate above its target of 4%. Central banks cannot control inflation or economic growth, they can only control credit growth and thereby influence money supply, wrote Prof VA Nageswaran. The biggest borrower by far being the government, low borrowing rates may encourage injudicious spending, leading to higher debt and rising interest payments. Then there is the rupee. "In the 12 months through November, the PPI (US Producer Price Index)  advanced 0.8% after increasing 0.5% in October," reported Reuters. This means the buying power of the rupee is decreasing at over 7% compared to 0.8% for the dollar. The rupee is riding high because foreign investors have bought Indian shares worth Rs 629.51 billion in November. The RBI has been buying dollars to stop the rupee strengthening too much and to increase liquidity into the system. One dollar bought Rs 3.30 at Independence in 1947, which has dropped to 73.66 today. At some point the rupee will have to adjust against the dollar and then prices of imports will shoot up, taking inflation to levels last seen in 2010-2011. No wonder, talks of higher fiscal spending is complete hot air. Frozen in fear. Like deer in headlights.